Benefits to third parties as a result of the actions of a separate agent
Positive externalities in consumption
Benefits are to third parties as a result of the actions of consumers
Positive externalities in consumption
Healthcare - being vaccinated against the flu
Education - individuals getting educated
Third parties
Economic agents not involved in the transaction or the activity at all
Individuals are educated
Rest of society benefits because individuals will be more productive, have higher incomes, pay more tax, which can be used to provide socially desirable things
Individuals exercise and eat healthy
Employers benefit from higher productivity of their workers
Diagram for positive externalities in consumption
Marginalsocialbenefit is higher than marginal private benefit
Free market allocates at private optimum (Q1, P1)
Social optimum is where MSB=MSC (Q*, P*)
Welfare loss is the triangle pointing towards the social optimum
Positive externalities in production
Benefits to thirdparties as a result of the actions of producers
Positive externalities in production
Firms offering high-quality in-work training schemes - other firms can poach trained workers
Firms engaging in R&D - other firms can copy the new technologies
Diagram for positive externalities in production
Marginal social cost is lower than marginal private cost
Free market allocates at private optimum (Q1, P1)
Social optimum is where MSC=MSB (Q*, P*)
Welfare loss is the triangle pointing towards the social optimum
Producers and consumers ignore the external benefits, leading to under-production and under-consumption compared to the social optimum, resulting in a misallocation of resources and welfare loss